Transitioning from gasoline to electric vehicles: Electrification decision of automakers under purchase and station subsidies

Promoting the diffusion of electric vehicles (EVs) is inseparable from the electrification of gasoline vehicle (GV) automakers. However, transitioning from GVs to EVs may confront challenges posed by the high costs of EV production and charging station construction. To address this issue, governments often offer purchase subsidies to consumers and/or station subsidies to automakers. This study investigates how these subsidies affect the decision of a monopoly automaker to enter the EV market and exit the GV market. Our analytical model incorporates factors including costs, subsidies, and competition, yielding several key findings. First, fierce product competition between GVs and EVs may keep the automaker from entering the EV market, whereas the automaker always has the opportunity to start EV production under weak competition. Second, the automaker may achieve electrification directly from GV to EV production as EV production costs decline, bypassing the strategy of entering the EV market first and subsequently exiting the GV market. Third, although both purchase and station subsidies can incentivize the automaker to enter the EV market, they may inadequately motivate (or potentially discourage) the automaker to exit the GV market, even if it is cost-effective to produce EVs and build charging stations. Last, our primary findings maintain qualitative robustness when considering price decisions, public charging stations, and asymmetric cases. Additionally, we extend our analysis to cover scenarios involving endogenous subsidies or duopoly competition.